# EC102_-_Ch_8_Saving_and_Investment_Quest - Answers - 1 1...

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2f80b98297c0e63d5108438aa6f0a886cc670e59.doc 1 1. Susan puts \$125 into an account and one year later has \$135; what was the interest rate? Recall formula for Future Value –  FV(j)  = PV(1 + R)j \$135 = \$125(1 + R) 1 \$135/\$125 = (1 + R) 1.08 = 1 + R 1.08 – 1 = R R = 0.08 Therefore, the real interest rate is 8% 2. What is the present value of a payment of \$150 one year from today if the interest rate is 6  percent? Recall formula for present value:  PV = FV (j)/ (1 + R) j = \$150/ (1 + 0.06) 1 = \$141.51 Calculate the future value for of each of the following in Table 1.  (Interest rate is an annual interest rate) Table 1 Present Value Interest Rate Term Future Value \$100  0.02 1 \$102.00 \$125  0.03 2 \$132.61 \$150  0.04 3 \$168.73 \$175  0.05 4 \$212.71 \$200  0.06 5 \$267.65 \$225  0.07 6 \$337.66 \$250  0.08 7 \$428.46 \$275  0.09 8 \$547.95 \$300  0.10 9 \$707.38

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2f80b98297c0e63d5108438aa6f0a886cc670e59.doc 2 \$325  0.11 10 \$922.81 \$350  0.12 11 \$1,217.49 4.  Calculate the present value of each of the following in Table 2.  Note, the relation between  the length of the term and the present value. Table 2 Future  Value Interest  Rate Term Present Value \$1,000  0.075 1 \$930.23  \$1,000  0.075 2 \$865.33  \$1,000  0.075 3 \$804.96  \$1,000  0.075 4 \$748.80  \$1,000  0.075 5 \$696.56  The present value is lower, the longer the term of the investment. 5.
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EC102_-_Ch_8_Saving_and_Investment_Quest - Answers - 1 1...

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